LG Uplus Corp

KRX:032640

Q1-2025 Earnings Call

[Operator]

Good morning, and good evening. Thank you all for joining this conference call. And now we will begin the conference of the fiscal year 2025 first quarter earnings results by LG Uplus.

This conference will start with a presentation followed by a divisional Q&A session. Our call is being webcasted on our homepage so that you can follow the conference simultaneously. Today's conference call will be presented for 1 hour. And due to schedule, we would appreciate if questions are limited to 2 per person.

Now we will begin the presentation on LG Uplus' First Quarter of Fiscal Year 2025 Earnings Results.

[Sangheum Mun, executive]

[Interpreted] Good afternoon. I am Sangheum Mun, Head of IR at LG Uplus. Let's begin the first quarter 2025 earnings presentation of LG Uplus. Please refer to our Q1 earnings presentation and note that the revenue and operating expense breakdown of each business are on the basis that excludes LG HelloVision, which we've prepared to facilitate ease of comparison.

As a disclaimer, all of the projections we are providing today may change subject to macroeconomic backdrop, and we will also be providing consecutive interpretation for the benefit of our overseas investors. With that said, let's begin our Q1 '25 performance highlights, which will be followed by the Q&A session.

Without further ado, I will turn it over to our CFO, Yeo Myunghee, who will run through the first quarter 2025 business results.

[Yeo Myunghee, executive]

[Interpreted] Good afternoon. As introduced, I am Yeo Myunghee, the CFO. Thank you to our analysts and investors for joining LG Uplus' first quarter 2025 earnings release call.

Under human-centric AI, which is our guiding post, we placed focus on not the technology itself, but the customers who are the users of such AI technology. And we unveiled Exy Guardian, which comprises of 3 AI technologies as a way to realize the core distinctive value offering of trust and safety. This AI technology protects users from the threat of voice phishing, ensuring a secure voice call experience and effectively alleviate concern about the risk of leaking of conversations.

In the meanwhile, to speed up the traction behind our core businesses, we entered into strategic partnerships with global leaders. In collaboration with Google, a #1 global search engine, we plan to scale up ixi-O in order to strengthen our B2C AI business and through close cooperation with AWS, who is global #1 cloud service provider, we are working under the goal of expanding the B2B AI market with a sharp focus on future businesses. Through such efforts, we intend to drive advanced outcomes from the AI business domain.

Now moving on to our first quarter financial results. Q1 service revenue reported a growth of 1.6% year-over-year on a consolidated basis and 1.7% increase on a separate basis, and we expect to be able to achieve our annual guidance.

Consolidated first quarter operating profit was up 15.6% on year, reporting KRW 255.4 billion. This is an outcome of structural improvement of underperforming businesses and continued efforts aimed at gaining cost competitiveness.

Consolidated net profit increased 24.6% on year, reporting KRW 162.5 billion. EBITDA also increased 3.8% year-over-year, reaching KRW 921.3 billion, sustaining an uptrend in operational cash flow.

Consolidated debt-to-equity ratio as at end of '24 was 124.5%, which is an improvement of 0.3 percentage points, while Q1 2025 CapEx was KRW 333.1 billion, a dip by 13.4% year-over-year.

[Jin-Wook Kang, executive]

[Interpreted] So that was a report on the business and financial results. And next, I will invite presentation on the performances and outlook from each of our business lines.

First, on mobile. I am Kang Jin-wook, Head of Mobile and Digital Innovations Group.

Q1 mobile service revenue was up 2.4% year-over-year, reporting KRW 1,542.8 billion.

Total mobile subscription count was up 10.7% year-over-year to 29,075,000, mostly driven by growth of IoT and MVNO subscription, each reporting a growth of 20% and 21.7%, respectively. Especially for MVNO, we gained #1 position in terms of number of postpaid subscription lines and continue to maintain #1 positioning for total cumulative subscription, including both prepaid and postpaid basis. 5G handset subscription count was up 14%, reaching penetration of 74.8%.

Q1 marketing spend increased 1.6% on year to KRW 555.8 billion due to expenses for MWC event. LG Uplus is driving bottom-line enhancements by strengthening its service competitiveness for the mobile business, and we are also actively seeking global expansion opportunities for ixi-O services.

To enhance the earnings structure, we are offering stronger benefits for the higher-end tariff plan. It's all about maximizing tangible value offerings versus the cost the customer pays by designing a scheme that includes benefits such as OTT or a second device bundling, VIP membership, et cetera, which will end up delivering more value than what the customer pays under the rate plan. Such design leads to higher customer satisfaction and is making positive contribution to service revenue enhancements. We plan to design such benefit-centric schemes and better communicate such plans so as to sustain a steady uptrend in the top-line.

Also, we recently announced collaboration with Google to further develop features of ixi-O, which is an AI agent service with an aim to strengthen our global market expansion. We will be using Google's AI model, Gemini to analyze the context of voice conversations with high precision, based on which we will add context-aware features such as summarizing the conversation and recommending follow-on actions. Such collaboration with global partners will form an important foothold for us to be equipped with distinct competitiveness in AI services and for us to fortify global positioning in the market.

[Park Chan-seung, executive]

[Interpreted] Next is Smart Home business, and this is Park Chan-seung, Head of Home Business Group. Q1 Smart Home revenue was up 2.4% year-over-year, recording KRW 630.6 billion.

On the back of impact from home shopping commissions revenue, IPTV revenue dipped by 1.2% year-over-year, while Internet revenue posted 6.9% year-on-year increase coming in at KRW 296.5 billion, following robust growth from Giga Internet subscribers.

Subscribers for IPTV and Internet all showed year-over-year growth. IPTV subscriber count increased 2.4%, reaching 5,611,000, while Internet subscriber count increased 3.4%, reaching 5,396,000. What's noteworthy is the mix of cumulative number of subscribers using above 1 gigabyte plan out of the total internet subscribers, which accounted for 29.1%, increasing by 4.9 percentage points year-over-year, which supported stable growth trend for the Internet revenue.

Smart Home business of LG Uplus focused on delivering everyday convenience to our customers while adding distinctive value for the users. And in January, we launched premium secure rate plan with beefed up security features. This plan offers higher level of security by blocking suspicious smishing and phishing URLs or sites that spread malicious codes. And if the user is exposed to attack while using the service, they will be able to receive compensation. We understand that this product is getting positive feedback as it eases security concerns and greater mix of new subscribers are choosing this plan, which is contributing to performance results.

We were also jointly named as #1 IPTV provider by NCSI, National Consumer Satisfaction Index in their IPTV assessment as we were recognized for high customer satisfaction. And it is on this basis, we see sustained uptrend in Internet and IPTV subscribers. Also, there is growing demand for Internet speed and diverse array of content, which is leading to an increased adoption of higher-end rate plans. We, therefore, plan to further strengthen operational efficiency and enhance cost competitiveness as a means to maximize profitability.

In order to bolster competitiveness of IPTV content, we entered into strategic partnership with Europe's biggest media company, Canal+, and will exclusively source original content produced by StudioCanal, which is its production subsidiary. By working with global media companies, we are continuously expanding our distinctive content lineup through which we will cater to the needs of highly selective customers who are not easily pleased by incumbent channels or the OTT platform.

[Jong-Wook Park, executive]

[Interpreted] Next is on B2B Infrastructure, and I am Park Jong-Wook, Head of Enterprise Innovation Group.

Q1 B2B Infrastructure revenue was KRW 409.7 billion, up 2.1% year-over-year. IDC revenue was steady in sync with the planned tenant time line moving up 2.1%. And enterprise line revenue also posted 3.1% growth, thanks to growing demand. Despite new business growth, solutions business posted year-over-year growth of 0.4% due to rise in messaging revenue last year.

For B2B Infrastructure business, we decided to start construction of next-generation data center to respond to demand for data centers early on, driven by higher adoption of AI by B2B customers and accelerated speed of cloud transition.

Paju AIDC building #1 is 50-megawatt in power reception capacity with completion target by May 2027, and it will support liquid cooling method, which is known for high cooling efficiency. The IDC is designed to meet up to high standard of global operations in terms of electricity efficiency per rack, service stability, operation efficiency and environmental standards. We thus expect to be able to secure our own competitiveness for IDC.

Our AICC business also reported encouraging results with customer wins from various industry sectors. This demonstrates the fact that our customers have recognized competitive edge we gained from internalization of technology such as our own language model ixi-GEN built from AI model EXAONE developed by LG AI Research Institute and the know-how gained from large-scale operation of customer centers. Based on these results, we will do our best to drive higher results by building references.

[Sangheum Mun, executive]

[Interpreted] This ends the business highlights, and I will now invite back our CFO, to share her thoughts on second quarter outlook.

[Yeo Myunghee, executive]

[Interpreted] In Q1, we achieved turnaround in profit supported by improvement in structural cost competitiveness. To sustain this uptrend in operating profit and cash flow beyond the second quarter, we are continuously pushing for ways to gain business efficiency. On top of maximizing earnings from our core telco business, we will continue to explore growth opportunities from the AI service domain. In particular, for AI solutions, we will first use them internally to verify the effects of productivity enhancement, after which we will actively push for market expansion by targeting business customers.

We at LG Uplus has set building a solid groundwork as the core of our business philosophy. We are particularly focused on raising our standards to meet and exceed customer expectations in terms of quality, safety and security. Based on this solid foundation, we will continue to build the groundwork for sustainable growth through differentiated capabilities and optimized management.

In terms of shareholder return, during last earnings call in February, we mentioned that we will be sharing the plan on treasury share cancellation after Q1 and share buyback to happen after Q2. We are looking into canceling entire 6.78 million treasury shares and are going through necessary internal processes. Also, considering projected annual net profit and cash flow, we will decide on the size of share buyback, and we'll share that update in due course. We hope that these efforts would show our sincere commitment behind driving long-term value enhancements through stronger shareholder return.

We will consider customer satisfaction and shareholder return enhancement as our #1 priorities and do our utmost to be a trusted company. Thank you.

[Sangheum Mun, executive]

[Interpreted] This ends the opening presentation. We will now open the floor for questions.

[Operator]

[Interpreted] [Operator Instructions] The first question will be provided by Heejin Lim from Citi.

[Heejin Lim, analyst]

[Interpreted] I am Hee Lim Jin from Citi. I have 3 questions that I would like to ask. First is, can you explain as to what the key driver was behind the turnaround that you recorded in the first quarter and also provide some color on what your outlook is for the entire year.

And in the opening presentation, you also mentioned value of program. I would like to understand what your plans are and direction is with regards to treasury share buyback and cancellation in the second half of the year. And if we look out into the upcoming 2 to 3 years, would your shareholder return policy be that of a progressive dividend policy?

Third question is, recently, there were some personal information-related issue at your competitor in this industry. I just would like to know whether there was any impact on your subscription acquisition. And if there was any certain change, these new subscribers that's onboarding or joining LG Uplus, are they also taking out bundling services?

0:30:09

[Yeo Myunghee, executive]

[Interpreted] Yes. This is the CFO taking your first question about the turnaround and the outlook going forward. So we've been able to report in Q1 an improved result on a year-over-year basis. If you look at last year, the major reason behind the decline in operating profit was due to the intangible amortization, which took place because of the upgrade in the overall IT system and also higher level of fixed cost, including the labor cost as we expanded into new business domains.

For the depreciation cost and amortization, we still have some time that is left for further depreciation, but we believe that there is no more upward pressure in terms of amortization and depreciation. And in terms of the labor cost, we believe that that increase is going to be limited because we are able to enjoy productivity enhancement through AX transition as well as reshuffling of the head count following improvement on the business structure.

And with the inauguration of the new CEO last year, we have much stronger strategies in place that focuses on qualitative growth and strengthening of profitability. So we've already scaled down or discontinued some of underperforming businesses such as B2C platform and B2B business, and that had a positive impact. So in Q1, in terms of making an operating profit improvement, such lower level of operational cost had a positive impact.

And we will continue to streamline the structure, mainly improving on the noncore business areas where we believe there's less likelihood for it to be profitable. And also by efficient allocation of the resources, we are going to maximize profitability. And through a very thorough assessment of the cost structure across all of our businesses, we want to be able to further enhance operational efficiencies. We will be very actively leveraging AI technology so that we can improve on productivity, accelerate digital transformation so that we can enjoy reduction in operational cost and secure cost competitiveness.

And because overall market growth is slowing, we think that a key strategy in these types of market backdrop is to have focus on profitability where profit growth is going to outpace revenue growth. So strengthening our profitability and ensuring stable financials is going to form the basis for us to achieve solid annual performance, and we are committed to exerting our utmost effort to achieve that objective.

Responding to your question about the value of plan and shareholder return policy, as you know, in November of last year, we disclosed and announced our value of plan. And our plan is to operate a very flexible share buyback policy at buying back at maximum 20% of net profit. Currently, we are going through processes to carry out a cancellation of the treasury shares that we own. And probably after the first half of the year, we will be able to share with you more detail with regards to the size of the potential share buyback.

So I can tell you that there has not been any change to our previous plan when it comes to treasury share buyback and cancellation and shareholder return policy. We are very much committed to continuously driving up the company's value from a mid- to longer-term perspective and enhancing that corporate and shareholder return.

So responding to your question, whether there's been any impact in terms of our subscriber acquisition under the current market backdrop, whether they are taking out bundled products or just taking out a standalone tariff plan, it's a bit cautious for us to share with you any specific information because it's only been a couple of days. So we will keep monitoring how things develop, and we'll be able to come back to you with more details at later point in time.

[Operator]

[Interpreted] The following question will be presented by Hoi Jae Kim from Daishin Securities.

[H.J. Kim, analyst]

[Interpreted] This is Kim Hoi Jae from Daishin Securities. Two questions from me. The first question relates to your Paju data center. I would like to understand as to the figure that you have disclosed in your disclosure, is that figure actually included in your preexisting CapEx number? I would like to get some color as to the actual CapEx and investments that will be required for Paju data center.

And you've mentioned the capacity of this IDC center is 50-megawatt. I would like to understand what -- starting when will this -- based on the revenue figure, when would you be able to actually have that be reflected on your accounts or your figures? And you've said that this is Paju AIDC building #1. Does that mean there's going to be additional buildings that is in the pipeline that will be built? And do you already have land and site already secured for that?

Another question is, recently, there's been an incident regarding the USIM privacy -- private information leakage incident. What security measures do you have in place? For instance, do you preemptively provide the security-related services to your subscribers so that they could be protected for the USIM that they use?

[Ahn HyurngGyoon, executive]

[Interpreted] I am Ahn HyurngGyoon in charge of Enterprise AI business. We've made the announcement through disclosure dated April the 29, and I can tell you that the amount that we disclosed, which is KRW 620 billion is already captured and reflected in the CapEx number, and things are going as per the plan.

So we will be providing a liquid cooling method and also there will be high level of electricity efficiency per server rack, and it will be built in a way that will fully meet the technical requirement of the global service providers as well as demand related to AI. Typically, after the IDC is complete, it will take about 4 to 5 years until the tenants start to move in. And the size of the revenue we expect is going to be about 60% to 70% of Pyeong-chon #2 center.

And your question regarding whether after this first building, we have plans to build additional buildings in the IDC, we are -- it's work in progress. We're currently devising the specific plan, and we'll come back to you in due course.

[Yeo Myunghee, executive]

[Interpreted] This is the CFO. Responding to your question about the USIM attack. When it comes to information security, one cannot guarantee anything 100%. So it's very important that we carry out ongoing checks and make sure that we make systematic enhancements so that we can prevent it as much as possible.

So we recently ran a contingency inspection across all of the systems where customer data is stored, and we were -- and we did not identify any anomalies at this point in time. We are inspecting all of the servers that the company has, and we have in place a system where we could actually detect on a real-time basis if and when there is a large capacity file transmission or we could be able to monitor the attackers' IP track record. So there is a very thorough monitoring that is ongoing.

Since our previous incident regarding security issues, we've really beefed up the fundamentals when it comes to security-related solutions, and we've upgraded our operational system by having a stronger protection against information security. And by adopting most up-to-date security technology, we are continuously strengthening various different activities so that we can solidify the customers' trust.

Regarding whether we're providing USIM protection service, we do have that service in place, and we have the appropriate preparations in place to provide them with when roaming as well as auto sign-up to such USIM protection services.

[Operator]

[Interpreted] The following question will be presented by Joonsop Kim from KB Securities.

We will now move on to the next question. There are no questions in the queue right now.

[Sangheum Mun, executive]

[Interpreted] With no questions on the queue, we would like to now close the first quarter 2025 earnings release call by LG Uplus. If you still have unanswered questions, please feel free to contact us at the IR team. Thank you.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]